A FedEx worker makes a delivery on September 16, 2022 in Miami Beach, Florida.
Joe Redl | Getty Images
fedex A preliminary earnings report last week warned of weakening global shipping demand, prompting the market to join hands to determine whether the problems reflect internal company deficiencies or macroeconomic diagnosis.
CEO Raj Subramaniam points to external factors when the shipping giant missed Wall Street’s earnings and revenue estimates, telling CNBC’s Jim Cramer on “Mad Money” That the company is “a reflection of everyone’s business” and that it expects a “worldwide recession”. But some analysts note the relative stability of rivals. UPS and DHL, and that FedEx’s failure to adapt itself also contributed to its performance.
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“This is the second year in a row that FedEx has recalled its own guidance for its fiscal first quarter, and I think that creates a little bit of investor frustration,” said Moody’s analyst Jonathan Kanarek.
Kanarek was among analysts who noted a mix of factors — internal and external — that likely played a role in FedEx’s disappointing results.
Some experts see FedEx’s performance as an overdue clash with market realities coming out of the pandemic, which the company previously failed to acknowledge.
At its Investor Day in June, FedEx set a bullish 2025 outlook driven by annual revenue growth of between 4% and 6% and earnings per share growth of between 14% and 19%.
Ken Hoxter, an analyst at Bank of America, said, “Raj brought a big show in June, his first Analyst Day in two years, and talked about an atmosphere that was very upbeat. Yet we were here three months later. Huh.” CNBC.
“They weren’t expecting, nor had created an economic downturn,” Hoxter said.
Since the time of his Investor Day, Subramaniam said last week that FedEx has seen a weekly decline in shipping volumes. That’s why the company withdrew its 2023 forecast and announced it would close offices and park planes to reduce costs. Its stock fell more than 21% the day after the report, wiping nearly $11 billion from its market capitalization.
Still, FedEx lived up to its 2025 expectations, a move that Gordon Haskett’s research advisors called a “borderline fallacy.” FedEx’s competitors, he says, are taking a more realistic approach to end the pandemic-era surge in demand.
While FedEx reported a softening in European demand amid its ills last week, UPS gained market share in the region. In its most recent earnings call, UPS claimed its highest quarterly consolidated operating margin in nearly 15 years, citing agility amid tough macroeconomic conditions.
“UPS is two to three years ahead of FedEx, depending on the way they are looking at post-Covid margins,” said Kevin Simpson of Capital Wealth. On Closing Bell: Overtime, “It’s almost as if FedEx didn’t think the environment would ever return to normal.”
As part of its cost-cutting efforts, FedEx said it would reduce some ground operations and defer hiring. Meanwhile, UPS will recruit more than 100,000 seasonal employees for the holiday period.
Analysts note that FedEx’s ground and express deliveries are sensitive to global economic conditions, and that the disappointing performance of the categories could reflect a bearish environment.
“We haven’t really seen evidence of a broad-based recession. But obviously FedEx is a bellwether and we don’t want to dismiss what we’re saying,” Moody’s Kanarek said.
Bank of America’s Hoexter Express sees the performance of the category, which is $500 million below FedEx’s own expectations, as the first indicator of a broader recession. A marginal drop in volumes has a significant impact on margins as air delivery costs a lot to maintain, he added.
Ground Service, which was $300 million less than the company’s forecasts, is next to feel the downturn: “When consumers stop buying, stores start filling shelves, you stop refilling those inventories.” give,” Hoxter said.
According to Bank of America’s Global Research Report, Hoexter’s bi-weekly truck shipper survey reported 11 straight periods in “bearish limits.” This comes as FedEx reports less business than expected with top customers target And walmartwho are in scuffle in both with spare stock in recent months.
FedEx reported strong freight margins, but Hoexter said the category is “more manufacturing-weighted, which is not a major drawback.” If demand continues to slow and manufacturers require less production, Hoexter said FedEx could start to see a softening of freight volumes as well.
Regardless of the factors driving FedEx’s troubles, the upcoming holiday season is likely to see no respite. In a statement, FedEx said the service is not expected to be affected by the cost-cutting actions announced last week. “We are confident in our ability this holiday season,” the company said.
But retailers expect a slowdown in holiday sales. And fearing the delay of last year, many people had shipped the goods early. The Port of Los Angeles said 70% of holiday goods had already hit shores by the end of August.
Inventory shortages that have plagued retailers in recent months may also persist, reducing shipping volumes and further straining FedEx’s business. A KPMG survey found that 56% of retail executives expect to be left with excess merchandise after the holidays.
If trouble persists, FedEx has some cushioning, notes the S&P’s Geoff Wilson. The company is sitting on a lot of cash — about $7 billion as of May 31 — as opposed to the roughly $3 to $4 billion it typically had before the pandemic. He also noted that the company has confirmed its share repurchase plan for approximately $1.5 billion.
“This is the best sign management can give long-term strength in FedEx,” Wilson said.